Gudang Garam, More growth to come

Wemaintain our BUY recommendation on GGRM with a higher TP following the strongvolume growth in 9M18. With more growth expected in 2019 on the back ofgovernment plans to maintain cigarette excise tariffs, we believe that thecompany is well placed to record higher FY19 earnings growth.

Strong 9M18 volume growth of 7% yoy.We recently met with the management of Gudang Garam and learned that thecompany continued to record strong volume growth in 9M18 of around 7% yoy,mainly supported by solid sales of value-for-money products. In November 2018,the company launched a new Low Tar Low Nicotine cigarette product, GG Move 12sticks with a competitive retail selling price of IDR13,500/pack (banderolprice of IDR13,450/pack). Based on our calculations, the net revenues marginfor this product is around26%.

While it is stilltoo early to gauge the market’s response, the company’s strategy of launching a new productat an affordable price point should complete its productportfolio. According to our survey, GGRM’s SKM cigarettes are offered at retailselling prices ranging from IDR15,500/pack (GG Signature Blue 16s or GG Surya12s) to IDR23,000/pack (GG Surya 16s).

FY19F earnings expectedto grow 17.2% yoy. Following the strongsales volume in 9M18, we revise up our FY18-19F sales volume growthestimates to 7.1% and8.1% from 4.5% and 3.9%, previously. Higher FY19F sales volume coupled withestimated 7.6% blended ASP growth should lead to brisk 16.1% yoy revenuesgrowth in 2019. To be conservative as we await the officialregulation on 2019’s excise tax, we maintain our FY19F forecasts for excise tax growth of 5.8% and 10.9% yoy for SKT and SKM. Nonetheless, higher ASP and sales volume increases should help lift the gross margin to 20.4%. Combined with maintained opex, we now estimate FY19F earnings of IDR9.8tn, +17.2% yoy (revised up by 6.4%).

Maintain BUY with a higher TP. All cigarette players should benefit from the decision
not to increase 2019’s excise tariffs. Bear in mind that over the past 5 years, the government has raised cigarette excise tariffs by around 10-15% each
year, resulting in falling industry sales volume. As such, over the long term,
the decision not to raise 2019’s excise tariffs will provide room for better
sales volume growth next year. Incorporating our new forecast in our valuation,
we arrive at a higher TP of IDR98,400 – based on DCF (WACC 10%, TG 3%). The
drivers are the expectation of continued solid volume growth approaching the
elections and the decision not to hike excise tariffs. BUY maintained.